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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
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Speaker 2: Terminal and the Bloomberg Business App. A slower FED.
Speaker 3: Speak on tap. This week we'll hear from Williams, Harker
Speaker 3: and Cook today. There are six more speakers tomorrow, plus
Speaker 3: retail sales data. On Thursday, more Fed Speak, plus housing
Speaker 3: starts and jobless claims. Neila Richardson of ADP writing this,
Speaker 3: jobs aren't everything. Labor market data has been decent news,
Speaker 3: but as a federal Reserve takes a wait and see
Speaker 3: approach on interest rates, we see big changes afoot on
Speaker 3: pay Neila joining us now and Neila, what I love
Speaker 3: is you can dig beneath the data at a time
Speaker 3: when it has been so confusing. Can you give us
Speaker 3: a sense of just sort of the sea changes under
Speaker 3: the hood that might be warping some of the overall
Speaker 3: index levels.
Speaker 2: That we're tracking.
Speaker 4: Sure, well, good morning, it's great to be with you
Speaker 4: all today. I think what's interesting about this moment is
Speaker 4: that this is the most PopEd and proddugt economy that
Speaker 4: I've ever seen. Every data point seems live and important.
Speaker 5: But it's not.
Speaker 4: It's sometimes like a caffey and what we're looking at
Speaker 4: at ADP we're going through to what we think is
Speaker 4: most important in the sea economy, which is how companies
Speaker 4: hire and what they pay, and that has changed significantly
Speaker 4: over the last four years. We've seen shifts in geographic
Speaker 4: distributions of people are commuting long distances. That has an
Speaker 4: effect on pay. In fact, we find in our latest
Speaker 4: reports out today that people who actually go the distance
Speaker 4: for employment make sixteen percent more than people on their
Speaker 4: own teams. So that's a huge change and it's under examined.
Speaker 4: In this market. We're seeing pay distribution change. The gaps
Speaker 4: between the wealthiest workers and the lowest paid workers has
Speaker 4: grown by our estimate five percentage points over the last
Speaker 4: four years. We're seeing occupational changes, We're software developers, which
Speaker 4: should be an.
Speaker 6: End demand job.
Speaker 4: With all of this talk about AI, there are fewer
Speaker 4: selfware developers now than in twenty eighteen. And then of
Speaker 4: course for all of us who have teenagers, some are
Speaker 4: hiring is in focus. The summer looks strong in terms
Speaker 4: of jobs, but not so strong in terms of pay
Speaker 4: for these young people. So all of these shifts feed
Speaker 4: into the narrative, and the distribution of the worker not
Speaker 4: something we talk about a lot.
Speaker 5: And I guess that's part of the reason why the
Speaker 5: data has been confusing, because there are these structural shifts
Speaker 5: that doesn't necessarily show itself on a headline level. So
Speaker 5: what do we do with the data? Then? Should we
Speaker 5: just ignore it? Should we discount it? Because things are
Speaker 5: different and what it's telling us isn't really what's happening
Speaker 5: under the surface.
Speaker 4: We can't discount it because we know that a certain
Speaker 4: really important institution is pegging a certain really important decision
Speaker 4: on the cancophany of data points. But that one move
Speaker 4: won't shape the economy. Whether you lower interest rates by
Speaker 4: one down one dip this year twenty five basis points
Speaker 4: or two or three really won't change the distribution of
Speaker 4: the US workforce, which has shifted. And I think that's
Speaker 4: what we're seeing in the data that pay change. This
Speaker 4: low level of wage growth that was really keeping the
Speaker 4: economy on track during the ten years of expansion is
Speaker 4: not here now that pay is changing, it's evolving, and
Speaker 4: that involvement in pay means that inflation may go up,
Speaker 4: may be higher for longer, and the Fed always has
Speaker 4: to be watchful on the stata point and on pay.
Speaker 4: In particular.
Speaker 7: Consumer sentiment did not look good on Friday, and the
Speaker 7: director of the survey had this to say, the views
Speaker 7: of middle income consumers resemble those of their lower income counterparts,
Speaker 7: a departure from historical patterns in which their mentions are
Speaker 7: squarely between those of higher and lower income consumers. So
Speaker 7: what are you saying that the wage gage gains are
Speaker 7: not on par with the inflation that middle and lower
Speaker 7: income individuals are feeling.
Speaker 4: You know, what they're seeing is price levels, and they're
Speaker 4: looking at, yes, their paychecks, but they're looking at what's
Speaker 4: in their basket at the grocery store. And as long
Speaker 4: as there's a disconnect between how much their take home
Speaker 4: pay has grown and how much their basket has shrunk,
Speaker 4: they're always going to be a little moody. Now we've
Speaker 4: seen that a moody bad vibes on the consumer side
Speaker 4: does not necessarily translate to lower retail spending. That's going
Speaker 4: to be something to watch this week. Last April, retail
Speaker 4: spending was flat. Those vibes have prepped in how long,
Speaker 4: how permanent they are, whether they affect spending is going
Speaker 4: to be really important. We've seen some resilience in the consumer.
Speaker 4: I would argue from the high end consumer. They have
Speaker 4: been carrying this economy. So it's a really interesting situation
Speaker 4: that we're seeing in the pay When you take the
Speaker 4: pay and the retail side together, what you're seeing is
Speaker 4: that firms are raising prices because they have to increase
Speaker 4: pay from all those double digit pay gains safety and
Speaker 4: from low paid workers. But the people who've actually benefited
Speaker 4: the most are high earners from asset prices, from higher
Speaker 4: wage games. And so you have this like combination, this cohabitation.
Speaker 4: I'm trying to crush it between high spending high earners
Speaker 4: and low income workers who are seeing high pay growth
Speaker 4: but not able to spend at the same rates because
Speaker 4: of higher price levels.
Speaker 3: I'm glad that you brought that up very that survey
Speaker 3: that came out and the commentary from what we got
Speaker 3: from the University of Michigan survey, it kind of raised
Speaker 3: alarm bells for me because it's atypical. Usually what you
Speaker 3: see is that middle income workers kind of are in
Speaker 3: the middle when it comes to how they feel relative
Speaker 3: to the high end and the low end. They're not
Speaker 3: this time. They're shifting to the low end, and it
Speaker 3: raises this question. It's been the big question for a
Speaker 3: lot of people. Are we seeing the beginning of a
Speaker 3: shift downward that's going to be a more protractive, protracted
Speaker 3: weakening in the labor market. Are you seeing that? Is
Speaker 3: this a problem for you? That whatever it is, you
Speaker 3: can't reject people's feelings on mass and so there's something
Speaker 3: going on that's going to potentially have a significant impact
Speaker 3: on the economy.
Speaker 4: Feelings do translate into behavior. That's why we measure them,
Speaker 4: That's why they're important. And if you're seeing a diffusion
Speaker 4: of bad vibes, I'm wayful that bad vibes through the
Speaker 4: income distribution. It doesn't spell good news for the economy.
Speaker 4: When I hear what I hear from main Street is
Speaker 4: I'm delaying, I'm being like the Fed to watch the
Speaker 4: watch before I take on that new lease of my
Speaker 4: new car. I'm going to watch before I buy that
Speaker 4: investment property, that rental property. So that waiting watching has
Speaker 4: an effect on the economy. So even if you can
Speaker 4: afford to spend, you may not do it this quarter
Speaker 4: because you're waiting.
Speaker 3: So this is sort of the diversions between the bulls
Speaker 3: and the bears. Some people I'm thinking of Andrew Hall
Speaker 3: and Horns out there is thinking this is the beginning
Speaker 3: of a real weakening that we're going to see in
Speaker 3: a labor market. Last week's climb and initial job, as claims,
Speaker 3: was a harbinger of a greater degree of weakening under
Speaker 3: the hood.
Speaker 4: Do you see that now? I think again that goes
Speaker 4: back to my comments about this economy being prodded a
Speaker 4: little bit. This is a normal economy. You're not going
Speaker 4: to make straight a's every quarter. You're going to have
Speaker 4: some weakness here and there. There's going to be weakness
Speaker 4: in pockets, but that doesn't mean that it's a persistence diffusion.
Speaker 4: What we're trying to figure out, and it's a hair
Speaker 4: trigger decision, is when the FED can feel comfortable cutting
Speaker 4: rates that doesn't mean the economy is bad because they
Speaker 4: start cutting it. I mean it's necessarily good because they
Speaker 4: start cutting it. I think what it means is that
Speaker 4: the FED as a whole collectively feels that they're a
Speaker 4: little more restrictive than they want to be in this
Speaker 4: particular normalizing economy.
Speaker 5: So feeling better about the vibe session maybe, But okay,
Speaker 5: one of this idea, I get not to harp on this,
Speaker 5: but this idea of all of a sudden everybody's feeling
Speaker 5: a lot worse in the middle income consumer too. Jim
Speaker 5: Bianco and looking at that UMich data basically looked at
Speaker 5: and said, there's been something strange happening with it. It's
Speaker 5: actually democratic opinion that has really turned. I wonder if
Speaker 5: you look at it and say the same thing. Maybe
Speaker 5: what's actually happening is that political bias, But it's this
Speaker 5: huge cohort saying maybe Trump is going to be elected,
Speaker 5: So it's still that political influence. But on the other
Speaker 5: side too. It's hard to tell.
Speaker 4: At the stage. We know that that MISS survey has
Speaker 4: had a methodological change too. It's gone online. We don't
Speaker 4: know if that changes the sample we've seen though for
Speaker 4: the past two months pretty downbeat sentiment. I'd be hesitant
Speaker 4: though then the changes that we've seen on the methodological
Speaker 4: end to put too much on the political differences right now.
Speaker 4: But we know that politics does affect opinion, does affect
Speaker 4: vibes on the economy, and we'll see and should track
Speaker 4: how that plays out over the course of the next
Speaker 4: six months.
Speaker 2: For sure.
Speaker 3: Neili Richardson of ADP and of Bloomberg Television contributor, thank
Speaker 3: you so much for being with us as always looking
Speaker 3: forward to next time. Sam stoveall of CFURI also looking
Speaker 3: closer at the tech trade, saying this, even those six
Speaker 3: sectors also advanced, The tech sector was the exclusive outperformer
Speaker 3: last week, causing one to wonder just how long this
Speaker 3: can keep? Can this jumbo jet keep flying on only
Speaker 3: one engine? Sam joins us now and Sam, I have
Speaker 3: to say this, in some ways is the quote of
Speaker 3: the morning to me, given the fact that this is
Speaker 3: the ultimate existential question. Is this US stock market ultimately
Speaker 3: incredibly vulnerable because of the dominance of the big tech
Speaker 3: names or is it incredibly resilient because of them? Is
Speaker 3: it a feature or is it a bug? What do
Speaker 3: you think?
Speaker 8: Well, Lisa, good morning, I think that it is resilient. However,
Speaker 8: I do believe that we are headed for a second
Speaker 8: decline of five percent or more in this year. Good
Speaker 8: news is, however, that based on my historical work, every
Speaker 8: one of those top fifteen first quarters ended up with
Speaker 8: a gain for the entire year, even though many of
Speaker 8: them went through two entry year declines of five percent
Speaker 8: or more, and those average annual increases exceeded twenty percent.
Speaker 8: But when I look to the S and P five hundred,
Speaker 8: I see it trading at a thirty two percent premium
Speaker 8: to its average twenty year pe.
Speaker 6: I look at TECH at a sixty.
Speaker 8: Eight percent premium, and I look at TECH at a
Speaker 8: twenty one percent premium on a relative pe basis, I
Speaker 8: do sort of wonder if we've jumped gone too far,
Speaker 8: too fast and need to reset the dials in order
Speaker 8: to maintain this longer term upward trajectory.
Speaker 3: So basically, you're saying that you think that TECH is
Speaker 3: going to pull back a bit as the rest of
Speaker 3: the index maybe just hovers around where it is now,
Speaker 3: and that's what's going to drive the index level five
Speaker 3: percent lower. Is that what I'm hearing from you?
Speaker 6: Well, I'm saying it's going to decline by at least
Speaker 6: five percent.
Speaker 8: Actually, history would say that we're probably going to experience
Speaker 8: a mild correction, So that forty eight hundred level on
Speaker 8: the S and P I don't think is out of
Speaker 8: the question at this point. I think that if we
Speaker 8: do start to see people take some profits in tech,
Speaker 8: it's not going to be just tech alone. Tech and
Speaker 8: consumer communications services are the only two sectors that are
Speaker 8: outperforming the S and P. Since we had about sixty
Speaker 8: eight percent of the S and P fifteen hundred sub
Speaker 8: industries trading above both their fifty and two hundred day
Speaker 8: moving averages, today that number is down to thirty eight percent.
Speaker 8: So while the market has been advancing, it's really being
Speaker 8: led by tech and to a much lesser extent, communication services.
Speaker 5: And it's been a long time since we've seen a
Speaker 5: five percent more or decline in this US stock market.
Speaker 5: It's been a long time since we've seen a two
Speaker 5: percent decline in this stock market. It is, as Bank
Speaker 5: of America wants called it, the Pavlovian urged to continue
Speaker 5: to buy because stocks keep going up? What needs to change?
Speaker 5: Because valuations alone haven't spooped investors, So what changes that
Speaker 5: allows for that sell off to happen.
Speaker 8: Sure well, we did experience a five point five percent
Speaker 8: decline from March twenty eight through April nineteenth, and we
Speaker 8: recovered everything we lost by mid May, which is not
Speaker 8: surprising because of the sixty four declines of five to
Speaker 8: ten percent since World War Two. It took us only
Speaker 8: a month and a half to get back to break even.
Speaker 8: So that's why I typically say that you're better off
Speaker 8: not allowing your emotions to drive your portfolio decisions.
Speaker 6: But as we saw last.
Speaker 8: Time, with the tenure yield creeping higher, causing investors to
Speaker 8: worry about where it would end up peaking, also the
Speaker 8: worry about the Fed not likely to cut interest rates
Speaker 8: three times, as the March dot plots had indicated. Most recently,
Speaker 8: expectations were for two. Yet I found that investory bulliance
Speaker 8: was dashed by the dots this time around, with the
Speaker 8: expectation now only being at one.
Speaker 6: So I think the question is how long will.
Speaker 8: The Fed maintain higher for longer and does that increase
Speaker 8: the risk of recession.
Speaker 7: You talk about your note this frustration by the Fed
Speaker 7: and people could have been humbling the meat loaf song
Speaker 7: two out of three am bad. What are you expecting
Speaker 7: this week?
Speaker 1: Then?
Speaker 7: From all the FEDS speak, do you expect them to
Speaker 7: be a bit more dubvish given the fact that the
Speaker 7: data potentially may mean they're going to cut before December.
Speaker 8: Well, Neil Kashkarri's comments, I think we're basically what he's
Speaker 8: been saying for a while, which is much more of
Speaker 8: a hawkish tone. Other commentary could yes, take the other
Speaker 8: side as well, because the FED wants to remind us that.
Speaker 6: They are data dependent.
Speaker 8: At the same time, I think they want to let
Speaker 8: us know that they are independent of political pressures. Every
Speaker 8: election year since nineteen ninety two except twenty twelve had
Speaker 8: the FED either raise or lower interest rates in that
Speaker 8: election year, and many times it occurred in September. So
Speaker 8: I don't think the FED would be averse to cutting
Speaker 8: rates if they felt that the data supported it.
Speaker 7: And you still think September remains in play, what's your
Speaker 7: biggest conviction for that.
Speaker 6: Well, when I look to.
Speaker 8: The CME forecast model, I see that we're looking at
Speaker 8: one third or a thirty eight percent in a sense,
Speaker 8: indicating that we're probably going to stay at that current level.
Speaker 8: But obviously sixty two percent are implying that we will
Speaker 8: probably see a cut in September of either twenty five
Speaker 8: or fifty basis points. That moves up to eighty percent
Speaker 8: for the July period and even higher for September.
Speaker 6: I'm sorry for December.
Speaker 8: So I would tend to say that the chances are
Speaker 8: increasing that we do end up seeing a cut of
Speaker 8: sometime this year. Would possibly two still on the table, Sam,
Speaker 8: A lot.
Speaker 3: Of people would agree with you. Last week we saw
Speaker 3: a massive rally in US government dead I'm looking at
Speaker 3: a twenty one basis point decline in ten your yields
Speaker 3: down to four point two two percent to end the week.
Speaker 3: Why is Why is that not igniting a rally? And
Speaker 3: some aspects of the risk market that have not participated.
Speaker 3: I'm thinking of small caps in particular.
Speaker 6: Well, I think, first off.
Speaker 8: The reason that one reason why the yields have been
Speaker 8: coming down is because the prices have been going up
Speaker 8: because interest rates look more attractive here in the US
Speaker 8: than an overseas, so that's attracting foreign investors. We certainly
Speaker 8: are looking at small caps now trading at a thirty
Speaker 8: one percent discount on a relative pe basis, mid caps
Speaker 8: at twenty five percent discount. I think it's because in
Speaker 8: investors want to wait until the FED does actually cut
Speaker 8: rates because of the potential of a rising risk of
Speaker 8: recession sends. These smaller and mid cap firms are the
Speaker 8: ones that will take it on the chin more so
Speaker 8: than large caps should we end up having something deeper
Speaker 8: than simply soft landing.
Speaker 6: So I think investors.
Speaker 8: Are playing it close to the vest at this point
Speaker 8: and focusing almost exclusively on the larger cap growth universe.
Speaker 3: Sam Stoveball of CFURI, thank you so much. Right now,
Speaker 3: we want to dive into what to expect to the
Speaker 3: remainder of the year and whether the balance of risks has.
Speaker 1: Shifted as we do.
Speaker 3: See a disinflationary tilt to more of the data, at
Speaker 3: least in the United States showing US now Stephen Major
Speaker 3: of HSBC and Lydia Burssor of EY both with US. Lydia,
Speaker 3: I want to start with you in terms of what
Speaker 3: you make over the rally that we've seen in bonds
Speaker 3: the last couple of weeks in particular, and what this
Speaker 3: signals about where the balance of risk is at a
Speaker 3: time with the Fed kind of had a hockey is
Speaker 3: still last week.
Speaker 1: Yeah, so we've seen softening in economic data, and I
Speaker 1: think that the narrative has been shifting towards the economy
Speaker 1: is slowing more than what was you know, anticipated earlier
Speaker 1: this year when inflation is surprised on the outside. So
Speaker 1: what we're seeing in terms of the economy is a
Speaker 1: gradual slow down in economic activity. The Fed, you know,
Speaker 1: last week was you know, somewhat you know, slightly more
Speaker 1: hockey than expected coming out of this meeting. There is
Speaker 1: really the sense that they have lost some conviction that
Speaker 1: inflation is moving back sustainably towards the two percon targets.
Speaker 1: So now when we look at you know, the next
Speaker 1: couple of months and the coming data that we were discussing,
Speaker 1: it's all going to be about rebuilding that confidence seeing
Speaker 1: less that softening and sequential inflation, but also seeing some
Speaker 1: stuffening in the label market for the Fed to be
Speaker 1: confident enough to start cutting interest rates.
Speaker 3: Stephen, what did you make of last week considering that
Speaker 3: we saw a harkish tilt to the Fed and you
Speaker 3: just reconfirmed in your media outlook a belief in a
Speaker 3: rip boring rally in US government bonds. They could potentially
Speaker 3: take the ten ure YEARLDS three and a half percent.
Speaker 9: Yeah, I'm quite glad we kept the bullish conviction. I mean,
Speaker 9: the news flow coming through on the back of these
Speaker 9: elections that you were talking about in the prelude to
Speaker 9: this interview, I think that really matters, and I think
Speaker 9: it kind of overwhelms the impact of these CPI and
Speaker 9: payrolls releases and the FED speak. So I think it
Speaker 9: was yourself or Danity that spoke about chaos.
Speaker 10: And you both mentioned France and Mexico.
Speaker 9: There's a lot of commonality here that these are spread
Speaker 9: markets that have a lot of overseas or non resident
Speaker 9: behind them, and they don't respond well to volatility shocks.
Speaker 9: In this case, you've had election results that have brought
Speaker 9: the fiscal challenges back into focus and bonds don't like that.
Speaker 9: So if you're get a flight to quality, people moved
Speaker 9: from French bonds to German bonds, from Mexican bonds to
Speaker 9: US bonds, and globally it's all knocking on, and I
Speaker 9: think you've got an unwind going on of all these
Speaker 9: carry trades. So at a time of type credit spreads
Speaker 9: and a bit of a bowl shock, it's no surprise
Speaker 9: that treasuries are doing quite well.
Speaker 5: Even though what happens when all of that meets us
Speaker 5: political instability? If we do see something in November that
Speaker 5: looks like uncertainty about the results, confusion about the results,
Speaker 5: confusion about the policy, where does that money go?
Speaker 9: Yeah, I guess at the start of the year everyone
Speaker 9: was focused on how many elections they were going to
Speaker 9: be this year. It's taken to the halfway point Delhi
Speaker 9: for there to be a significant shot, because, I mean,
Speaker 9: the Indian result wasn't a big shock in a way,
Speaker 9: and it is a very domestic market.
Speaker 10: The reason Mexico and France matter is because they're so international.
Speaker 9: So the US election is still a long way away,
Speaker 9: and I think everyone who's watching this show knows that
Speaker 9: there's a lot of debt, and they know what the
Speaker 9: policies are of the two presumed candidates, so it's not
Speaker 9: like a big unknown out there. It seems to me
Speaker 9: that part of the reason that data is cooling is
Speaker 9: because the fiscal impulse is starting to fade. And I
Speaker 9: think all of us should just recognize whoever's the president
Speaker 9: in twenty twenty five is going to have double the
Speaker 9: death stock of eight years ago.
Speaker 10: So whoever's there is going to be somehow.
Speaker 9: Restricted in what can be done in terms of future
Speaker 9: fiscal loosening. I didn't think the US, by the way,
Speaker 9: is in that bad shape fiscally. I'm talking here about
Speaker 9: relative to other countries and considering the asset base.
Speaker 10: The growth of GDP has been has really helped.
Speaker 9: But of course if the economy is cooling and the
Speaker 9: debt keeps going up.
Speaker 10: Then you have more challenges.
Speaker 9: But I don't think the US treasury market should be
Speaker 9: so worried about the debt lydia.
Speaker 5: What about from an economist's point of view, if we
Speaker 5: do have it doesn't matter who's in. We know what
Speaker 5: the fiscal situation is, what the debt looks like, a
Speaker 5: fiscal impulse, that fase doesn't matter. Do we need to
Speaker 5: start worrying about the deficit?
Speaker 1: Yeah, I mean we all can agree that, you know,
Speaker 1: the fiscal policy is on an unsustainable trajectory. When we
Speaker 1: look at interest payments on the debt, they reason, you know,
Speaker 1: to three percent of GDP, which is double the pre
Speaker 1: pandemic rate. Now, I don't think you know, this is
Speaker 1: threatening the outlook in the short run, but it does
Speaker 1: both economic challenges in the long run. It pushing interest
Speaker 1: rates higher can generate inflation, can weigh on growth, and
Speaker 1: then more importantly, it also means that there is more
Speaker 1: limited physical space in the events of a down pair.
Speaker 7: Stephen, when you say that the US doesn't look so bad,
Speaker 7: is that because relative to what is going on in
Speaker 7: the rest of the world that the US doesn't look
Speaker 7: so bad? Or is it because you actually think the
Speaker 7: US is okay when it comes to its fiscal trajectory.
Speaker 10: Yeah, a combination of both.
Speaker 9: I don't know whether this is an English or American saying,
Speaker 9: but we call it the least dirty shirt, So I
Speaker 9: sort of imagine looking through my wardrobe and trying to
Speaker 9: find the cleanest, brightest white shirt to wear. It's a
Speaker 9: bit like that in that the US debt stock as
Speaker 9: a percentage of GDP, if you look at the total
Speaker 9: debt total debt that's public and private sector, since the
Speaker 9: two thousand and eight financial crisis, it's gone up, but
Speaker 9: it hasn't gone up.
Speaker 10: As much as some other countries.
Speaker 9: And it's also been helped in the US by the
Speaker 9: fact that household has deleveled, so.
Speaker 10: On a relative basis.
Speaker 9: It looks not so bad, and on a historical basis
Speaker 9: it's okay, And I think that part of the factor
Speaker 9: is the strength of the GDP and the tax take.
Speaker 9: Now looking forward, the US has incredible taxing ability, But
Speaker 9: as we know, it's all a question of willingness, and.
Speaker 7: It's also a question of policy. You know, we have
Speaker 7: a new report out today talking about the fact that
Speaker 7: if Trump's proposal to exempt tips, for example, from taxation,
Speaker 7: it would bet one hundred and fifty billion to two
Speaker 7: hundred and fifty billion added to thefcial federal budget deficit.
Speaker 7: Is it very difficult to think about twenty twenty five
Speaker 7: until we know Stephn the outcome of November or are
Speaker 7: you just expecting there's going to be a lot more
Speaker 7: debt added to the US.
Speaker 9: I think that that's a big number you just put
Speaker 9: out there. But there's also going to be money coming
Speaker 9: in on the other side, because don't forget there's money
Speaker 9: from tariffs for example.
Speaker 10: I mean, we just don't.
Speaker 9: Know what the outcome is going to be, and it
Speaker 9: all depends on whether we have a sweep or not,
Speaker 9: because I think the fiscal outlook will very much depend
Speaker 9: on whether either candidate wins with a sweep. So so's
Speaker 9: it's tricky and and I think in terms of probabilities
Speaker 9: at the moment, you wouldn't go down a baseline or
Speaker 9: base case of there being fiscal irresponsibility. I think that
Speaker 9: that is it is a risk, it's a scenario, but
Speaker 9: it's not the baseline.
Speaker 10: And at the moment, I.
Speaker 9: Look at US treasuries and I think that their priced
Speaker 9: appropriately given where the policy rate is. If the policy
Speaker 9: rate starts coming down, yields are going to fall, and
Speaker 9: they're going to fall quite fast. That's what really matters.
Speaker 9: Bond yields don't go up because there's a lot of supply,
Speaker 9: and it seems that some people want to inject additional
Speaker 9: term premium into treasuries because of the supply. I think
Speaker 9: it's already there, you can already see it.
Speaker 7: But do I do agree?
Speaker 10: Yeah.
Speaker 1: I mean looking at you know, the elections and what
Speaker 1: the implications could be for the economy, there is a
Speaker 1: lot of uncertainty surrounding you know, the post election landscape.
Speaker 1: When we look at the economic impact, we really focus
Speaker 1: on two key themes that will be very important. The
Speaker 1: first one is fiscal policy. But you know, the Tax
Speaker 1: Cut and Jobs Act in particular, and the expiration of
Speaker 1: the Tax Cut and Jobs Act. That's going to be
Speaker 1: an important issue and you know, can represent a fiscal
Speaker 1: mini physical cliff. We've estimated it could you know, shave
Speaker 1: one percentage point of GDP. There is also what's happening
Speaker 1: on the trade front, with the potential for you know,
Speaker 1: escalation in tariffs. We're already in an environment where inflation
Speaker 1: is still elevated, so seeing you know, more inflationary impulse
Speaker 1: and you know, potentially some heat to growth would not
Speaker 1: necessarily be a desirable environment we want to be and
Speaker 1: especially as the Fed embark on that is in cycle.
Speaker 3: We're talking with Steven Major of HSBC and Lydia Bisor
Speaker 3: of e Y, both of you at a time when
Speaker 3: talking about yields going lower in the face of disinflation
Speaker 3: as well as US just being.
Speaker 1: A haven for a lot of dollars.
Speaker 3: Lydia, at what point to lower yields boost the economy,
Speaker 3: boost the economic activity in the United States and have
Speaker 3: a self reinforcing cycle versus indicate some weakness that actually
Speaker 3: would be negative for the growth prospects.
Speaker 1: Yeah, I mean, when when we look at the economy today,
Speaker 1: we're looking at an economy slow down underway. We've seen
Speaker 1: some rebalancing in the label market market, some softening in
Speaker 1: label market indicators. We're looking at consumers being more cautious
Speaker 1: with your spending, investments also softening, and companies being more
Speaker 1: discerning with their spending and hiring because you know of
Speaker 1: this you know, tighter credit coundition environment and because consumer
Speaker 1: them pass soften and consumers are more price positive. So
Speaker 1: in this economic environment, with signs of softening in the
Speaker 1: label market, we're expecting to see that recalibration and monetary
Speaker 1: policy happening, you know, towards you know, September. We're expecting
Speaker 1: the first rake cuts in September and rates starting to
Speaker 1: gradually move lower and move away from that restrictive fall system.
Speaker 1: And you know, by you know, seeing that those rates
Speaker 1: moving lower, we should you know, ensure that the economy
Speaker 1: doesn't slow down materially. We're expecting to see growth palling
Speaker 1: below trend in the coming quarters, but we're not expecting
Speaker 1: to see a retrenchment in economic activity. And the fact
Speaker 1: that the FED is going to embark on that is
Speaker 1: in cycle should allow for that cycle to continue and
Speaker 1: run through twenty twenty five.
Speaker 3: Steven, what's your view on this, because some people would
Speaker 3: say that this economy has been a lot less sensitive
Speaker 3: to rate hikes, why would they be so sensitive to
Speaker 3: rate cuts.
Speaker 9: Yeah, that's a fair point. So get to be careful
Speaker 9: with this one, because I think that people are expecting
Speaker 9: just very modest rake cuts. In fact, that's all conditioned
Speaker 9: by what the Fed's just told us in their dot blot.
Speaker 10: So I find a bit of an echo.
Speaker 9: Chamber around the mainstream forecasts because they're all basically one standard,
Speaker 9: the aviation from the FED. It strikes me that it's
Speaker 9: probably true that the economy isn't that sensitive to the
Speaker 9: rate cuts, But when the rate cuts come, I think
Speaker 9: they're probably going to be more than the markets pricing in.
Speaker 10: And that's exactly the point that cutting by twenty five
Speaker 10: basus points here or there isn't going to do anything.
Speaker 10: So when the.
Speaker 9: Economy is really cooling, and if unemployment is going up
Speaker 9: at a faster rate than the Fed's forecast, I think
Speaker 9: that that could be a kind of scenario to think
Speaker 9: about the then rates will be cut quite hard and fast. Also,
Speaker 9: it's not just about the US cyclical economic data. It's
Speaker 9: about the it's about the structural facts. It's this huge
Speaker 9: stock of debt It's about what's happening in China and
Speaker 9: Europe and ultimately US rates just look out of line
Speaker 9: with everything else.
Speaker 3: Stephen Major of HSBC, Lydia Bassor of EY, both of you,
Speaker 3: thank you so much. On a week where we'll be
Speaker 3: talking a lot about the Third and Reeds.
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